The Committee on Securities Regulation (the "Committee") of the Business Law Section of the New York State Bar Association appreciates the invitation in Release No. 34-47622 to comment on the proposed rule change and amendment No. 1 thereto by the New York Stock Exchange, Inc. ("NYSE") relating to corporate governance.

The Committee is composed of members of the New York Bar, a principal part of whose practice is in securities regulation. The Committee includes lawyers in private practice and in corporation law departments. A draft of this letter was reviewed by certain members of the Committee, and the views expressed in this letter are generally consistent with those of the majority of members who reviewed and commented on the letter in draft form. The views set forth in this letter, however, are those of the Committee and do not necessarily reflect the views of the organizations with which its members are associated, the New York State Bar Association, or its Business Law Section.

The Committee supports the NYSE's objective of improving the independence standards for outside directors in general and audit committee members in particular. However, we have some concerns that the application of some of the proposed standards may be difficult, if not impossible, for NYSE listed companies to follow. We also are concerned that, even if NYSE listed companies could comply with those standards, they may not promote the best interests of investors.

Immediate Family Member

Our particular concern is the broad reach of the independence requirements in light of the encompassing definition of "immediate family member." The proposal would add Section 303A to the NYSE listing standards for equity listings. Subsection 2 would tighten the definition of "independent director." Specifically, the proposal adds the requirements set out in clauses (b) (i), (ii), (iii) and (iv). Each of these clauses bases the determination of a director's independence on the relationships with the NYSE listed company of the director and the director's immediate family. The General Commentary to Section 303A(2)(b) states that an "immediate family member" includes a person's spouse, parents, children, siblings, mothers and fathers in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares such person's home.

The Committee's first concern is the practicality of carrying out the diligence necessary to know whether a director meets the Subsection 2(b) requirements. Currently, most such inquiries are carried out through confirmations directly by the NYSE listed company with companies it believes may have a relationship with the listed company directors and by information sought indirectly by the listed company through questionnaires given to the directors. We believe that each of these avenues may not be completely effective because of the broad reach of the requirements. The company may not be aware of the business entities at which any of the specified family members may have a relationship, and thus may not be able to gather the information. More importantly, a director may not be aware of all the company relationships possible for all of his or her family members. In its simplest form, a director of a NYSE listed company may not be aware that his daughter-in-law, living half way around the world and employed by an unaffiliated company, is directly receiving compensation (clause (i)) or has an employer that receives revenues (clause (iv)) from a NYSE listed company affiliate, quite possibly with a different corporate name. In fact, the employer may not know that either. Furthermore, what is the director to do? Should he or she send questionnaires to each specified type of relative? What does the director do if the relative fails or refuses to answer, which is entirely possible given the extensive immediate family described. Finally, what do the listed company, the director, and the responsive family member do if the other company refuses to provide the necessary information? The proposed requirement covers private companies and companies the family members cannot control.

All of the foregoing address the impossible information gathering process that the proposal would require of the NYSE listed company and its directors. We also have concerns even if the company and the directors could be certain they had received accurate responses to all their information requests. We question the need for a loss of independence because anyone in the immediate family group is an executive officer of a company which derives 2% of its revenues from the NYSE listed company. We have similar questions about the need to disqualify a director because an immediate family member is a professional employee of the listed company's external auditor.

We note that the Committee would reach a different conclusion if the family member definition was limited to the director's household, like the definition of "indirect" in Rule 10A-3(e)(8) for listed company audit committee members. At that level, the interest of the director is more likely to be significant. However, for an adult child or in-law to present a problem if employed at an accounting firm is unduly restrictive when that accountant is covered even if not working on the NYSE listed company engagement and when there are only four firms auditing the vast majority of NYSE listed companies (and possibly only four realistic employers for that accountant's skills). The NYSE rule seems out of place when the auditor independence rules would not disqualify that auditor.

We recognize that the proposed definition of "immediate family member" is substantially the same as that currently used in Section 303.02(A). However, the problem does not arise in its current use. The only place in Section 303.01 where it currently appears is Subsection (B)(3)(d) dealing with executive officer-director relationships. It is reasonable to expect a director to know whether his or her immediate family members are executive officers of the same listed company; it is not reasonable in the broader context proposed.

Many of these concerns could also be addressed by limiting the requirement to material relationships, since we only seek to exclude relationships that may exist, but are immaterial. Note that Instruction 2 to Regulation S-K Item 404(a) contains a similar broad definition of immediate family member, but it has not caused a problem because Item 404(a) has a materiality limitation. In any event, a revision of the definition for Subsection 2(b) as recommended in this letter would not raise serious problems since the board of each NYSE listed company would be required to affirmatively determine each director's independence under Subsection 2(a). The broad and strict limits of Subsection 2(b) are uncalled for.

We feel it is particularly troublesome that the definition applies to independence overall, and not just audit committee independence. These restrictions remove the director not only from helping satisfy the majority of independent directors standard required by Section 303A(1), but also make the director unable to serve on three important committees: audit, compensation, and nominating/governance. Given the fact that these relationships may actually be unquestionably immaterial, it is not in investors' best interests to so limit the pool of independent directors.

Deferred Contingent Compensation

The Committee is also concerned by the limitation on deferred compensation in Subsection 2(b)(i). It provides that the $100,000 cap on director compensation (exclusive of board and committee fees) includes deferred compensation that is contingent on continued service. Deferred compensation for directors is largely intended to address tax planning for the directors. The applicable tax law requires that there be no more than an unfunded promise to make future cash payments and that there be a substantial risk of forfeiture for property (such as stock) to be received in the future. We believe that it is in the best interests of investors to encourage board and committee membership through continuation of the types of plans that are common today, which give the directors an interest in the continued profitability of the company.

As indicated above, where directors' fees payable in cash are deferred, the tax deferral is normally based upon the fact that the deferral is an unfunded promise to pay which is not due until some point in the future. From the director's point of view, however, that does impose a potential contingency. Receipt will depend on the company's credit at a future time and the possibility of a change of control of the company to an adversarial group which may refuse to pay. It is important that any new listing standards that prohibit contingent payments clarify that risks such as the company's future creditworthiness or a change of control are not contingencies for the purposes of the new listing standard.

With regard to deferral of property (most importantly restricted stock), the tax law requires a substantial risk of forfeiture. For non-employee director plans, we believe it is common to provide that restricted stock may be forfeited if the director does not continue to serve until a specified retirement age or the passage of a specified number of years of service. We take it for granted that is a contingency. We recommend that any new listing standards on this subject exclude this contingency from the requirements. We believe it is in the best interest of investors to provide this type of compensation to the limited number of qualified candidates for the ever more demanding job of director and committee member for a listed company.

Clarification of "Organization"

Section 2(a) of proposed Section 303A provides, in part, that "No director qualifies as 'independent' unless the board of directors affirmatively determines that the director has no material relationship with the listed company (either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company)." Although we understand that the term "organization" is contained in current Section 303.01, we believe it would be helpful to listed companies for the proposed Section or Commentary to state what is meant by the term "organization." Specifically, is the term "organization" in the proposed Section intended to refer to the entity with which the listed company has the material relationship, or to the entity and its affiliates? If the term is intended to include affiliates, would the term be applied to the parents and subsidiaries of the entity with the relationship, or to all other relationships in a corporate group. For example, would the proposed Section prohibit a person who serves as an officer of a company that has no material relationship with the listed company from being deemed independent because a "sister" company (owned by a common parent) has a material relationship with the company? With respect to this latter case, we believe there exist valid reasons why an officer of a sister company having no direct or (through subsidiaries) indirect relationship with the listed company should be deemed to be independent, so long as the officer's duties do not involve a supervisory role over the entity with the business relationship. Because we are aware of corporate groups that include, for example, banks and financial service companies that provide services to a large number of listed companies, the clarification of the scope of this provision in the final Section would be extremely helpful.

Conformance to S.E.C. Rules on Listed Company Audit Committees

We also note that the proposed standards should be modified to conform to the Securities Exchange Act rules on listed company audit committees. The words "from listed company employees" should be deleted after the word "complaints" at the beginning of proposed Section 303A.7(c)(ii), to conform to Rule 10A-3(b)(3)(i) which is not limited to complaints from company employees. The second part of proposed Section 303A.7(c)(ii) is appropriately limited to complaints from employees. In addition, the funding provision in proposed Section 303A.7(c)(iv) should be expanded to reflect requirements under Rule 10A-3(b)(5)(i) and (iii), which provide for funding of the audit firm and of audit committee administrative expenses.

We hope the Commission finds these comments helpful. We would be happy to meet with the Staff to discuss these comments further.